Many farmers may think about it but relitively few move their main business banking from one bank to another. If you’re considering moving banks, these tips could help you with the process.
While agriculture is still very much a favoured sector for banks to lend to, the ability to service and repay borrowing is increasingly important, despite the security of rising land prices.
Banks are under pressure to build their capital accounts and reduce their risk profile so borrowing takes longer than in the past to organise.
Lenders are also making more use of covenants that impose performance conditions on the borrower’s business. Failure to meet these requirements can result in the facility being withdrawn.
In general, bank structures are more rigid and prescriptive than those of a few years ago and bank staff who may have been able to sanction certain levels of lending in the past often no longer have that authority, says Ashley Clarkson, director of agriculture at accountant Grant Thornton.
“Banks don’t like surprises so keep your bank informed about what’s going on in your business – build the relationship not only with your own bank but get other banks on to the farm to get to know your business and use them as a sounding board.”
Why switch?
Common reasons for farmers wanting to change banks include new enterprises that the current lender does not want to fund; changes in staff or relationships are also common drivers, as are generational changes in the farming business.
Most farm overdraft margins are at about two points over base rate, having been on average cheaper than this in the past.
“Banks are looking for bigger margins over base now because while their lending is at a margin over base, their borrowing is related to the London Interbank Offered Rate [Libor] and these rates have increased.”
This means that fees and other charges have also generally increased. “If you have a sound business, there will be competition for your banking custom and you may be able to negotiate some reduction in fees and charges, for example getting the bank to take on some of the charges such as the cost of valuations,” says Mr Clarkson.
“When considering moving, look at the overall cost, not just the headline lending rates – and get the bank to set out exactly what all the elements including any fees and charges will be – it may be that what looks like a cheaper offer ends up costing the same overall because of the extras.”
Those looking to move their overdraft need to provide information on how much will be needed, for how long and why, accompanied by a good cashflow forecast and a budget, says Mr Clarkson. This will need to demonstrate some sensitivity to input and output price changes along with technical yield and output fluctuations.
Loan repayments
One main change over the past five years is the increasing desire of the banks to see loan repayment structures put in place, says Mr Clarkson.
“The main banks are now very reluctant to do interest-only deals and lending is far more likely to be over a shorter term – say 10-15 years rather than the 20-25 year deals on offer just a few years ago.”
Where loan facilities are sought, deeds and related documents such as tenancies need to be in order and to hand so that the provision of security is straightforward. “Consider also how the need to repay the existing facility will impact cashflow and watch out for any penalties associated with repayment.
“Make sure accounts are up to date, have good historic performance figures available for the business and be clear about the long-term objectives, including succession.
“Once you have seen a range of banks it is up to them to come back to you with a proposal – if they are keen to win your business there will be some flexibility and elements of negotiation – you might be able to stretch the repayment profile, for example,” says Mr Clarkson.
“People do get hung up on margin over base rate but that may not be the key. Also, don’t necessarily try to get the biggest overdraft – think about putting some of it on loan because with a loan you are only paying one arrangement fee – with an overdraft there will be an annual renewal fee which is percentage-based and relates to the size of the facility.”
Infrastructure and support
Find out what the infrastructure and support is like with any new bank too, says Mr Clarkson. “It may not have the resources or systems of other lenders. Can you bank online with it, what is the branch structure like, who would you be dealing with, what’s the experience of other farmers who bank there? If your business handles a lot of cash, what are the practicalities of this with a new lender?”
Once a decision to change has been made, switching a current account should be relatively straightforward although fixed and floating charges associated with farming overdrafts mean that it often takes longer than the seven days promised by the banks.
The transfer of direct debit and standing order obligations are handled by the banks as part of the switching service but other issues such as tax and VAT payments need a careful watch, as do insurance payments and seasonal or one-off income such as ELS or HLS payments.
Credit rating
Beware of anything that may impact your credit rating if it is not paid on time, warns Mr Clarkson. To avoid this, consider keeping the old account open for a few months with a contingency fund.
Delays to a bank switch most often occur in the transfer of security. “Documents are not always as up to date as they should be – there may even have been a transfer of assets between generations since the last time security was used for borrowing.”
Driven by poor returns on cash deposits, peer-to-peer lending is growing, offering competitive working capital lending and a better return than traditional banks are offering for depositors. However this is usually short-term lending of six to nine months, says Mr Clarkson.
He warns that it is not uncommon for people to change their mind about moving banks at the last minute because they discover at this late stage that they will have to pay large penalties for getting out of their existing arrangements.
Not only does this waste time and effort but by this late stage the relationship with the existing lender may also have been damaged by the plan to move banks.
